Most of you are likely familiar with the investment adage “Sell in May and Go Away.”  It sounds good but it doesn’t really tell you what to do with your money, does it? Plus, wouldn’t it make sense to sell before May, ahead of the pack? Let’s look at the background before plotting a path or a source for your investment dollars.

This saying represents the second half of what some refer to as The Halloween Indicator which proffers that stocks perform best from November through April.  A number of “back-testing” has been implemented by looking at 10, 20, 40, 50, and 60 year periods and in most cases, the majority of gains are in fact borne from November through April and losses in May through October. 

To provide you with the most up-to-date results, I looked up the average monthly return of the S&P 500 Index from 1950 – 2013.  After calculating the returns I found that the average monthly return (excluding dividends) for the index from May – October was 0.22% compared with an average monthly return of 1.05% from November - April. That is a nearly five-fold difference, so clearly this sentiment and strategy have merit. 

As we have been preaching of late, we are transitioning into a new investment mode, one which is led by fundamentals rather than the quick trade or momentum plays. The shift has been driven by valuation concerns, a slowdown in the housing sector of the economy, and to some degree the nearing end of quantitative easing.

Interestingly, many of our recent comments regarding market performance and shifts to value, etc. were echoed in major financial publications this past weekend and we expect this fundamental approach and trend to continue.

Twelve New Investment Tactics

Assuming you are being prudent and taking profits and throwing in the towel on some losses, it is time to invest the old school way. Using these strategies are sure to have favorable impact on your portfolio. Here are twelve tactics primed to help you ride the new investment rotation:

1. Buy stocks trading at or below the P/E or Price/Earnings/Growth (PEG) ratios of the market at large.

2. Seek out fundamental turnaround situations and try and avoid stocks with large debt positions.

3. Expanding margins good, declining margins and slow top-line growth bad

4. Engage in a new, hard and fast sell strategy. Sell once a stock drops 15%.

5. Leave story stocks for the water cooler unless they truly leverage new trends.

6. Don’t be afraid of cash. Sit on 10-15%.

7.  When possible, compare peers’ financial and stock performance to ensure that you pick the right stock.

8. Diversify across industries.  After all, there is no real, clear cut winner for the near term.

9. Monitor institutional transactions and filings more closely than insider transactions.

10. Take a small position in stocks that have agreed to be acquired for cash and are trading below the cash acquisition price. While the returns are small, there are guaranteed and your funds will only be tied up for a short period.

11. The natural maneuver in shifting markets is to avoid emerging market stocks. Buy highly liquid stocks trading at a 10% or more discount to their U.S.-based peer group.

12. Stage your investments by buying small positions first and add to them if you feel comfortable. This way if the stock drops by 15% or more you have fewer dollars at risk. Plus, you will get in a routine of closely following your individual stock investments.

Bonus: In addition to selling the occasional calls on long positions, consider buying a nominal number of October puts on the market. 

Have a great week!